Transcript Money

Agenda- 5/15
1.
2.
3.
4.
5.
Ch. 15 Lecture (RS)
Ch. 15 Book Work (LS)
Stock Market Log
Catch up!
HW: Stock Market, Community Service
Ch. 14, Sec. 1 & 2
Money
Moola, moola
Mmm…
Copyright © 2000 by David Beck
Money is only a tool used to
make economic exchanges easier.
• It always must represent
something for it to have value.
• Chiefly, it is a reflection of
wealth held by its owner.
Historically, money has been
almost anything. Examples:
• Stones.
• Seashells.
• Animal skins.
• Cigarettes.
What is the
new trendy
money?
Mostly precious metals has been the
consideration behind money’s value.
How did bank
notes develop? Coins were
once used having full content
of metal.
• Private banks then issued their
own notes, widely accepted on
bank’s reputation.
• (read, don’t write)
Abuses (read, don’t write)
• Most banks printed only the amount of
currency they could back with gold and
silver.
• A few, however, got clever and decided to
print more money than they could back.
These banks were called “wildcats”.
Other problems (read, don’t write)
• Each bank issued different currency. By the
Civil War, the United States had 1,600
banks issuing more than 10,000 kinds of
paper currency!
• People didn’t trust bank notes because it
was hard to tell whether it was a real note
backed by a legitimate bank.
In 1913…
• The federal government
established the Federal Reserve
System and it set up a standard
currency for the entire nation.
What backs up your money today?
• We used to be on the gold
standard, which meant you
could exchange any paper
money for its value in gold.
What backs up your money today?
First…
• The U.S. government—
its strength and stability.
“The full faith and credit of…”
• Our confidence in that government.
• What if that government goes under?
What are the three functions of
money?
1. Measure of value.
2. Store of value.
3. Medium of exchange.
1.
2.
3.
4.
What are the notable
characteristics of money?
Durable—it must last.
Portable—it must be easy to
carry around.
Divisible—change must be
able to be made with it.
Recognizable—it can be easily
identified.
More characteristics…
5. Unreproducable—it can’t be easily
reproduced.
6. Transferable—it can be given from
one to another.
7. Adequate-but-limited—it should be
in good supply but not too
abundantly.
And one more characteristic…
8. Stable—it cannot change its value
too abruptly.
This is the trickiest characteristic
of them all.
What happens when it is unstable?
Mid-way point class assignment
• Left-side (will be more questions to follow ; )
• P. 388
–#2&3
What kinds of money
are there today?
M1
• Currency and coins in
circulation—1/3 of money.
• Demand deposits, used as checking
accounts—2/3 of money.
More money out
there today…
M2 = M1 +…
• Savings and money market
accounts.
How are banks and the
government involved in all this?
• Government monitors $$$ as
it goes through the banks.
• Banks are required to have a
reserve set aside— $$$ they
don’t lend out.
Basic idea of banking –
Fractional Reserve Banking
• Banks use a portion/fraction of
deposits to lend and charge
interest—the “price” of the loan.
• Loans are only as good as the
borrowers’ ability to pay them back.
What if a bank goes under? 
• FDIC was set up to
insure depositors.
• It insures your $$$
up to $250,000.
Banks can actually create money.
• Annie puts $10,000 in the bank, and the bank can
then loan out 9,000 of it. ($1000 on reserve)
• Henry gets a loan for $9,000, and puts it in his bank,
which can loan out 8,100 of it.
• Peggy gets a loan for $8,100 and puts it in her bank,
which can loan out 7,300 of it.
• How much is now out there in the economy?
• How much was originally deposited?
Look! “Created” money!
Perfectly legal, too!
Original deposit
$10,000
Wow!
Is that
for
real?!
Total of $$$ out there now
$9,000
8,100
7,300
$24,400!
Fractional Reserve Banking
Bank Run / Reserve Banking
Ch. 14 book work
• P. 388
–#2&3
• P. 397 - # 3, 5, & 6
The Fed
Ch. 14, Sec. 3
The central bank of the U.S.
• It is the Federal Reserve
System. For short: The Fed.
• It is an independent government
organization that is accountable
to its member banks.
The Fed
• The system is divided into 12 districts.
• It is run by the Federal Reserve Board of
Governors.
It’s leadership: 7 officers, each with 14 year terms.
• The Chairman: Janet Yellen
• Former Chairman: Ben Bernanke /
• Alan Greenspan, a very powerful
individual.
What is the nature of its power?
• It manages the flow of
money in and out of the
economy.
1.
2.
3.
4.
5.
What are its significant
responsibilities?
Clear checks.
Regulate banks.
Recommend consumer banking
laws.
Maintain currency.
Use monetary policy to control
money supply.
What is monetary policy?
• The tools used by The Fed to
make sure the right amount
of money is in the economy.
Quick Intro to The Fed
Monetary policy
• When $ is put into the economy,
then interest rates
• You hope to get more
employment 
• But you may also get inflation 
Monetary policy
• When $ is taken out of the
economy, then interest rates
• You hope to get less inflation 
• But you may also get
unemployment 
How a Decrease in the Money Supply Increases
Interest Rates
Interest
Rate
(Price
of a
loan)
1. An decrease in the
Money Supply…
S2
S1
2.5 %
2.0 %
New
equilibrium
Initial equilibrium
2. . . . resulting
in a higher
Interest Rate
Demand
0
3. . . . and a lower
quantity available to loan
Quantity of
Money in the Economy
Copyright©2003 Southwestern/Thomson Learning
What is their goal?
• It is to keep the
economy stable!
How the Fed uses monetary policy
(Read, don’t write)
Goal
More
employment 
(but more
inflation )
Objective
PUT $$$ IN
$$$
The U.S.
economy
Using monetary policy
(Read, don’t write)
Goal
Objective
Less inflation 
Take
$$$
(but more
unemployment ) The U.S.
economy
out
$$$
What are the three ways the Fed
tries to do this?
Open Market Operations
$$
IN
$$
Out
Reserve Ratio
Discount (Interest) Rate
What are the three ways the Fed
tries to do this?
Open Market Operations
$$
IN
$$
Out
Buy
Government
Securities
Sell
Government
Securities
Reserve Ratio
Discount (Interest) Rate
Open Market Operations
• The Fed BUYS Govt. securities from US to
put $$$ into the Economy
• The Fed SELLS Govt. securities to US to
remove $$$ from the Economy
Buying and selling of
government securities
(Read, don’t write)
$$$
The Fed
BUYS
Savings
Bonds
The economy,
where the
people are!
Buying and selling of
government securities
(Read, don’t write)
$$$
The Fed
SELLS
Savings
Bonds
The economy,
where the
people are!
What are the three ways the Fed
tries to do this?
Open Market Reserve Ratio
$$
IN
$$
Out
Discount (Interest) Rate
Buy Decrease
Government
Securities
Sell
Government
Securities
Increase
Reserve Ratio
• Fed has control over the reserves
in its banks.
• The reserve rate is the percent of
deposits that cannot be loaned out.
• Reserve ratio has an inverse effect
on the Money Supply
– RR
MS
and vice-versa
What are the three ways the Fed
tries to do this?
Open Market Reserve Ratio
$$
IN
$$
Out
Discount (Interest) Rate
Buy Decrease Lower
Government
Securities
Sell
Government
Securities
Increase
Raise
Discount Rate
• The Fed determines the Discount Rate:
• The rate the Fed charges on loans to its
member bank.
– When the Fed raises or lowers the discount rate,
all other interest rates also increase or decrease
in a direct relationship.
– Consumer interest rates are usually several
points higher than the discount rate.
The idea is…
• If interest rates are higher,
then fewer people will
borrow money.
• Therefore there will be less
money in the economy.
By the same rule…
• If interest rates are lower,
then more people will want
to take out loans.
• There will then be more
money in the economy.
What are the three ways the Fed
tries to do this?
Open Market Reserve Ratio
$$
IN
$$
Out
Discount (Interest) Rate
Buy Decrease Lower
Government
Securities
Sell
Government
Securities
Put money in = Easy
Increase
Raise
Easy (Expansionary)
Monetary Policy
• Buy securities
• Reduce reserve ratio
• Lower discount rate
– Used when economy is sluggish (falling GDP)
– Stimulates investment, expands production and
employment
– Possible side-effect: Can fuel inflation
What are the three ways the Fed
tries to do this?
Open Market Reserve Ratio
$$
IN
$$
Out
Discount (Interest) Rate
Buy Decrease Lower
Government
Securities
Sell
Government
Securities
Increase
Raise
Take money out--Tight
Tight (Contractionary)
Monetary Policy
• Sell securities
• Increase reserve ratio
• Raise discount rate
– Used when economy is overheated (rapidly
increasing GDP and inflation)
– Decrease investment and slow economic
expansion
– Possible side-effect: Can cause increase in
unemployment
One other way the Fed may
influence monetary policy is with…
• “Moralsuasion”
• When the Fed speaks,
people listen!
(Particularly people who
manage $$$, especially if
it’s their own!)
Homework review
p. 410
- #18
- #21
- #23-25
Monetary Policy quick video review
Errgh! That’s not very encouraging…
It isn’t? Ahhh, but did
you know that there are a
number of things you can do about all
this?!
There are! But first, let’s see what
the Government can do to stabilize
the economy.
Ch. 15
Fiscal Policy
Or
What can the Government do???
Aggregate Supply
• The total value of all G & S
that all firms will produce in
a specific time period at
various price levels
Aggregate Demand
• The total value of all G & S
demanded at different price
levels
What can the Government do to
stabilize the economy ?
• The Government sets Fiscal Policy
– Government’s decisions about government
spending (G) & taxing to stabilize the economy
to:
• Increasing output (GDP)
• Decrease unemployment
• Reducing inflation
What can the government do to
stabilize the economy?
– The President can propose fiscal
policy BUT
– Congress must approve all
government spending and all tax
rates
Fiscal Policy
Supply-side policies
•
production
• Cut taxes and government regulations to
incentives for business & individuals
• Businesses invest and expand, creating jobs;
people work harder, save and spend more
•
investment and productivity lead to
output
• With output
, the economy grows and
unemployment goes down
Supply-side Fiscal Policy
“Trickle-down” theory
– If you lower corporate taxes and/or
give corporation government
subsidies this will
• create more jobs for ordinary
citizens
• who then benefit indirectly from a
fiscal policy that benefits
corporations
Demand-side Policy
• Stimulates
demand for goods & services
to spur output
– Cut taxes / give a “refund" or increase federal
spending
•(
“G” in GDP) to put money into people’s hands
– With more money, people buy more
– Businesses output to meet growing demand
– With output , the economy grows and
unemployment goes down
Easy (Expansionary)Fiscal Policy
- Used when economy is faced w/recession,
high levels of unemployment and slow
growth in GDP (Stimulates the economy)
• Increased government spending (increase “G”)
• Lower taxes
• A combination of the two
Tight (Contractionary)
Fiscal Policy
Used when growth is overheated (demand for
workers (by firms) or goods (by consumers)
• Decreased government spending (decrease “G”)
• Increased taxes
• A combination of the two
Homework/Warm-up
•
•
•
•
•
P 417 - # 1
P 420 - ? On Govt. Spending
P 424 - ? On Tax Rates
P 426 – “Timber” ?
P 427 - # 2 – 4